10/21/10 7:49 PMRyan Avent Is Overly Harsh... - Grasping Reality with Both Hands

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Grasping Reality with Both HandsThe Semi-Daily Journal of Economist J. Bradford DeLong: Fair, Balanced, Reality-Based, and Even-HandedDepartment of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 7080467; delong@econ.berkeley.edu.

Economics 210aWeblog ArchivesDeLong Hot on GoogleDeLong Hot on Google BlogsearchSeptember 23, 2010

Ryan Avent Is Overly Harsh...

He writes:

Free exchange: MY CRUSADE for a more sophisticated discussion about theAmerican labour market seems to be falling short of its goals. Lawrence Mishelreleased a note yesterday entitled, "Debunking the theory of structuralunemployment", which concluded:

Widespread claims that our unemployment crisis is structural are not onlyinaccurate, but they imply that macroeconomic tools such as fiscal policy(spending or tax cuts) or monetary policy can not address our unemploymentcrisis. Surprisingly, perhaps amazingly, there’s no systematic empiricalevidence for such assertions. Policy makers should understand that theproblem faced by the unemployed is a simple scarcity of jobs...

Sigh. First of all structural unemployment isn't a "theory" to be "debunked"...

He misreads Larry: the "theory" to be debunked is the theory that our currentunemployment is structural, and thus that standard expansionary macroeconomicpolicy tools would not be effective. And, indeed, that is what those who are saying thatour current unemployment is structural are claiming: that standard expansionarymacroeconomic policy tools would not be effective.

So when Ryan writes:

contrary to most of the people poo-pooing the structural side of things, structuralunemployment does not imply that government should do nothing...

He should be writing:

contrary to most of the people pushing the importance of the structural side ofthings, structural unemployment does not imply that the government should donothing...

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10/21/10 7:49 PMRyan Avent Is Overly Harsh... - Grasping Reality with Both Hands

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The overwhelmingly likely possibility is that at the moment little of our unemploymentis "structural," but that if demand is not boosted to reduce cyclical unemployment thatit will turn into structural unemployment and then be with us for a decade or more.The fact that cyclical unemployment turns into structural unemployment is apossibility that adds immense urgency and power to the case for more demandstimulus right now.

Yet that is not what Ryan Avent concludes. Instead he reaches for the "plague on bothyour houses" journalistic trope:

Policymakers have become less interested in knowing what problems need solvingand more interested in knowing how best to sell the policies they'd like to enact.Republicans don't want to enact stimulus, but wouldn't mind cutting taxes, cuttingthe minimum wage, and rolling back other labour rules. Democrats may want toenact more stimulus, but they also remain interested in other programmes thatare likely to boost spending (in practice, it's hard to know what "Democrats" want—the caucus is hardly speaking in unison right now). And so the polarised policydiscussion sources itself in a polarised analysis of current conditions. And if youcare to influence this policy debate, you have to speak in polarised terms. Policy isexplicitly zero-sum. If you acknowledge structural unemployment, you strengthenthe Republican policy argument and weaken the Democratic policy argument....[S]ome prominent economic writers appear to have so internalised the polarisedmethod of argumentation that they no longer recognise they're doing it. It comesnaturally, even when discussing issues that haven't necessarily been wedged intothe polar, partisan dynamic.

It's unfortunate, and frustrating, and disappointing. But I don't know thatanything can be done about it.

What Ryan could do is say that the fact that some of our unemployment may bestructural and a lot more is likely to become structural makes the Republican policystance not just stupid and destructive but insane and catastrophic.

That would advance the debate...

Brad DeLong on September 23, 2010 at 08:36 AM in Economics, Economics: Labor,Economics: Macro, Obama Administration | Permalink

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Peter K. said...

10/21/10 7:49 PMRyan Avent Is Overly Harsh... - Grasping Reality with Both Hands

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I've always believed Avent to be overrated.

Reply September 23, 2010 at 09:07 AMJimW said...I had understood structural unemployment to mean a state of affairs where jobvacancies exist that don't match up with the characteristics of unemployed people. It'spretty clear that the data don't support the argument that this is now a significantshare of unemployment. However, it does appear that a significant share of today'sunemployment arises from a downward shift in the demand for labor at any given levelof output. Businesses are working the existing workforce harder and appear less willingto hoard labor in anticipation of an upturn in demand. It's unclear whether this is apermanent improvement in productivity--that the missing labor demand representsshedding of deadwood--or whether it's temporary and will be reversed as soon asdemand is stronger and employees have enough bargaining power to resist demandsfor uncompensated extra effort. We'll see. The polarizing debate appears to be aboutwhy we've seen this shift in the labor demand/output relationship. The President'sopponents attribute it to his policies--perceived anti-business attitude causing businessto be unwilling to make human capital investments, costs of health care, fear of taxincreases, and so forth. I think that this group mistakenly refers to this source ofunemployment as "structural," by which it means unemployment that is notattributable to a shortfall in demand, as opposed to unemployment that is matched byjob vacancies. Personally, I attribute it to employers' (realistically) forecasting aprolonged shortfall in demand and preparing for that contingency. But I don't know,and it's an interesting question.

Reply September 23, 2010 at 10:09 AMRobert Waldmann said...Avent's whole argument is based on the idea that if one objects to saying the problem isstructrural then one must argue that it isn't in part structural. It depends on what thedefinition of "is" is. In English when one says "A is B" one means "all of A is B". InAventish one means "part of A is B" so when I say "this computer is gold" I am right,and he shouldn't complain if he pays me $1000 an ounce and finds just a little gold.

Now I don't think the English language is perfect. For example, there is the verb "topolarize" which has clear negative connotations. There isn't a simple verb for cursingboth houses and rigidly assuming (or lazily asserting) that the truth is somewhere inbetween. I have attempted to invent "to Ballance" ex congressman Jack Ballance (D-Iforget) who was included in a Washington Post list of office holding crooked politiciansto add balance http://tinyurl.com/ykh8n8b .

Reply September 23, 2010 at 11:01 AMDrDick said...If he means by structural unemployment that all of the highly paid skilled laborpositions have been shipped overseas and that the laid off workers are overqualified towork at McDonalds, he may have a point. Otherwise, what we are clearly looking at isa lack of demand, not a lack of labor supply. Of course the response of the conventionalwisdom will be that this demands that we cut taxes for the very rich and ignore theactual productive workers.

Reply September 23, 2010 at 11:14 AMRiver said...I am not a economist, but when you say that aggregate demand needs to be stimulatedto get us out of this mess sounds an awful lot like GWBush's advice after 9/11 for the

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populace to go shopping to get the economy moving. Didn't we just get out of a hugebubble, where the level of demand was artificially inflated by fraud and overleveragedborrowing, and this ponzi scheme basically collapsed? Doesn't the prescription forstimulating aggregate demand totally discount this fact?

When people say that the economy suffers from "structural issues," I read between thelines to think that the structural issues they are talking about are that our jobs havebeen shipped overseas incrementally over the last 10 to 15 years, and that the rest of uswith jobs are too indebted to increase our spending.

I am not arguing that the government should do nothing, but until I start to heareconomists talking about stuff that looks like the real world from my perspective, Ikind of lose faith in their ability to fix this problem (I kind of doubt this problem nevergets fixed).

Reply September 23, 2010 at 01:02 PMScamp Dog said in reply to River...If I recall correctly, the GWB advice to go out shopping was about restoring confidencethat everything would work out, we didn't need to shut down our economy to pay forthe war effort, etc, etc.

I agree with you that a good chunk of the housing bubble was generated by fraud andover-leveraged borrowing, but I think that may have been more of a supply issue: thefinancial markets were awash in money and there weren't many good investments outthere, so hey, let's lend people money to buy new houses or refinance their old ones.

The demand problem now is that people out of work, and people afraid of losing theirjobs reduce spending as much as they can.

If it's just you losing your job, it sucks to be you. If you lost your job because the plantlaid off 500 people, it also sucks to be the local car dealer, a restaurant owner, the drycleaner, whoever. Now they start getting rid of employees, too, who reduce theirspending... Lather, rinse, repeat.

Spending doesn't drop to zero of course, because people have to eat, they'll try to makethe mortgage as long as possible, the kids need new clothes, they'll drive to job fairs,interviews and such.

Now imagine you want to start a new business. Well, who's going to buy yourproduct/service? All those out-of-work people sure won't be buying, the worried-about-their-jobs probably won't, and anyway the bank won't loan you money becausethey think you won't be able to pay them back (no customers, remember?), and theeconomy can get stuck for some time.

Brad, our host here, is publishing the notes from his Econ 1 course, and I highlyrecommend them for getting you up to speed on economics.

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